Fundamental clarity for financials investors

Video: Investors Club | Ceasefire implications, plus the alternatives playbook (7 mins)

US bank earnings season is in full swing this week, with several of the largest financials companies reporting over the next few days. Goldman Sachs reported its best quarterly earnings in five years, supported by strong trading revenue on volatile market conditions. Expectations at the sector level are for a solid first quarter, helped by elevated trading activity, resilient investment banking fees, and a still-supportive backdrop for net interest income.

The macro outlook, however, is more complicated than the headline numbers might suggest, given the geopolitical uncertainties around Iran and higher energy prices. Investor concerns have also widened amid late-cycle credit risk, private credit redemptions, and the share price recovery already seen in parts of the financials sector. Last month, we closed our "Global Banks" thematic view, as the global sector’s risk-reward looked less compelling on more normalized valuations, crowded positioning, and an increasingly challenging macro backdrop.

However, without taking single-company views, we still see reasons for an Attractive rating on US financials:

US capital markets activity should support earnings. The clearest near-term support for US financials is stronger activity in trading and investment banking. Recent volatility has created a better backdrop for market-making and client activity, while deal pipelines appear more resilient than feared even if sponsor activity remains uneven. In our view, that matters because it broadens earnings support beyond simple rate sensitivity. It also means that exchanges and capital-markets-oriented businesses can benefit from the same uncertainty that complicates the outlook for more cyclical sectors.

Rates and regulation remain supportive. With the market consensus now for fewer Federal Reserve rate cuts, this should be a modest positive for much of the financials sector, particularly where net interest margins and fee income remain healthy. We also see the recent Basel 3 Endgame proposals as either largely in line or slightly better than we had previously expected, with banks set to face modestly easier capital requirements overall. The bigger benefit may be clarity itself, allowing bank leadership to move past years of regulatory uncertainty and deploy excess capital more confidently through buybacks, balance-sheet growth, and selective investment in growth initiatives.

Credit risks look manageable, not absent. We do not dismiss concerns around private credit, leveraged finance, and late-cycle dynamics. Those risks were part of the rationale for closing the "Global Banks" theme last month, and we also moved private credit to Neutral in our alternatives strategy last September. That said, credit quality at US banks so far appears fairly solid, and default rates are low. This earnings season should help confirm that there is no broad-based deterioration in core bank books. In our view, the credit backdrop argues for balanced exposure rather than retreat, with earnings resilience and strong capital levels helping offset richer valuations.

So, while we moved to a Neutral stance on global financials, we think the US financials sector still offers an attractive mix of improving net interest margins, rising capital-markets activity, and supportive deregulatory tailwinds. We continue to focus on high-quality banks, exchanges, and diversified fee-based financial businesses that can benefit from both resilient fundamentals and elevated activity levels.

More broadly, we expect first-quarter S&P 500 earnings growth of 17%, the fastest pace in five years, and we retain an Attractive view on US equities. Alongside US financials, we continue to favor consumer discretionary, health care, industrials, and utilities in the US.